The Top 3 Rules For Navigating The Bitcoin, Blockchain And Crypto Craze

Cryptocurrency—a word added to the Oxford dictionary just four years ago—has since woven its way into conversations at cocktail parties, on the golf course and everywhere in between. As digital currency creeps into our daily discussions, new evangelists buy in and drive prices higher. In effect, a digital currency like Bitcoin uses encryption to regulate new units, to transfer funds and to operate out of the purview of the traditional banking system. But investors seem to care more about riding the price wave than whether blockchain successfully transforms the way money changes hands (or digital wallets) in our economy. It’s the type of blind fervor that feels more reminiscent of the Beanie Babies bubble than any sort of Wall Street asset fad.

Many entering the crypto market might look to supposed strategists who offer predictions on which currencies will thrive and how prices in the broader market might trend. Unfortunately, those who claim to know the future constantly contradict one another. Meanwhile, feelings of greed and the fear of missing out can lead us to blindly jump in based on little more than tips from the water cooler. As an advisor, I encourage everyone to recognize the risks, to better understand the purpose of digital currencies and to discount the advice of so-called experts. To that end, I’ve compiled a list of the top 3 rules for navigating the crypto craze.

Recognize the Risk

Before succumbing to the allure of exponential returns, we need to recognize that buying digital currency is currently more akin to playing roulette in Las Vegas than investing in stocks, bonds or conventional currencies. While cryptocurrency may very well revolutionize traditional banking in the future, blockchain technology will face many challenges before becoming mainstream. For now, buying into blockchain is purely speculative, meaning the prices of these currencies currently reflect a herd mentality rather than any intrinsic value. Like with Beanie Babies, currency prices could plummet if the group-think shifts.

To be fair, many currencies have little to no intrinsic value. The U.S. dollar, for example, wouldn’t be worth more than the paper on which it’s printed without widespread trust in the “full faith and credit” of the U.S. government. But unlike blockchain currencies, the dollar gained its authority thanks to hundreds of years of economic strength and stability. Any cryptocurrency will struggle to achieve such status while facing increasing government interference like IRS tracking and other problems like hacking. We should recognize that these variables only add to the considerable risk of price volatility.

Refocus on the Tech

Rather than taking a gamble on a particular crypto platform solely for the sake of quick gains, we should refocus on understanding the underlying technology. While future uses for blockchain seem limitless, the technology proves its worth through its most fundamental premise to circumvent conventional banking, allowing buyers and sellers to exchange value without the participation of an institutional middleman. While we’ve historically relied on private and central banks to control the flow of money, events like the Great Recession and recent revelations of fraudulent practices have led customers to lose faith in the system. Despite the many challenges, this paradigm shift clearly bodes well for a decentralized and transparent blockchain.

In better understanding blockchain and its related roadblocks, we can analyze cryptocurrencies based not on their price performance, but on their ability to establish secure, operational platforms and to properly manage issues like regulation, taxation and cybersecurity. In other words, we should pay more attention to cryptos that might achieve long-term success as a usable currency rather than the cryptos with the highest short-term price spikes. As the surge in ICOs has proven, many new currencies come to market as pump-and-dump scams designed to simply raise quick cash rather than to create a successful, lasting transaction system. Investors should consider using new blockchain exchange traded funds (ETFs) coming to market to reduce platform-specific risk and to gain broad exposure to blockchain.

Discount the Experts

Every supposed expert has his or her take on the future of cryptocurrency prices. Unfortunately, such experts tell completely contradictory stories, leaving us to interpret an endless stream of inconsistent and very often biased information. For example, Jamie Dimon, chairman and CEO of JP Morgan Chase—a bank that would clearly face disruption from blockchain—has called people stupid for buying Bitcoin. Meanwhile, Christine Lagarde, the head of the International Monetary Fund, has called people unwise for dismissing virtual currencies. We need to recognize that regardless of credentials or brainpower, it’s impossible for anyone to foretell what’s to come for crypto.

Rather than worrying about whether to buy into crypto, investors should first build buy-and-hold, globally diversified portfolios. In doing so, we accept that we can’t predict what’s next for any particular asset. Rather than trying to win big on a one-off bet like we’re in Las Vegas, our portfolios should reflect things like our goals, liquidity needs, risk tolerance and time horizon. With a diversified portfolio in place, we can invest an appropriate amount in higher-risk assets like digital currencies without jeopardizing our financial wellbeing if the investment faces a total loss.

Diversification and a long-term investment strategy can help us suppress the fear- and greed-based impulses that lead us to take on unneeded risk and make disastrous investment decisions. Despite the crypto allure, we need to recognize these risks, refocus on understanding the underlying blockchain technology and forget about expert opinion. Whether blockchain becomes the next Beanie Babies bubble or revolutionizes our economy, we can take a breath, find financial strength in a broader investment strategy and not fall victim to the crypto craze.

At my day job, I help people align life and wealth. You can learn more about our financial planning philosophy on our website: www.conwaywealthgroup.com.